Interim Results

Quester VCT plc Interim statement for the six months ended 31 August 2005 Financial highlights Per ordinary share 6 months to 13 Months to 6 months to 31 August 28 February 31 July 2004 2005 2005 Capital values Net asset value 42.2p 44.1p 49.0p Share price 38.0p 44.0p 44.0p Return and dividends Dividend - - - Cumulative dividend 41.5p 41.5p 41.5p Total return* 83.7p 85.6p 90.5p *Net asset value plus cumulative dividend per share A dividend of 1.25p per share was paid on 11 November 2005 increasing the cumulative dividend to 42.75p. The returns summarised above are applicable only to original subscribers for shares in Quester VCT plc. They do not represent the historic returns to subsequent subscribers, including those who have assumed a shareholding in the Company following the merger with Quester VCT 2 plc and Quester VCT 3 plc. The above table excludes any tax benefits (20% income tax relief and capital gains deferral) received on subscription for shares in the Company. Inclusive of initial income tax relief, the total return to an original investor would be equivalent to 103.7p per share as at 31 August 2005. Fund Highlights * Merger successfully achieved; net assets of over £50 million. * Net asset value 42.2p per share, down by 1.2p per share since the merger. * Increase in range and diversity of the portfolio; 38 venture capital investments. * Increasing pace of realizations. * Annual running costs reduced. Chairman's Statement Introduction This is the first interim statement to shareholders following the successful merger of the Company with Quester VCT 2 plc and Quester VCT 3 plc which completed on 29 June 2005. It is also my first statement since I succeeded Tom Scruby as Chairman, following the merger. Tom, who has been a director of the Company since it was founded in 1996, has agreed to remain as a non-executive director for a period following the merger. It is intended that he will retire from the board during 2006. While David Quysner resigned due to conflicts arising from his appointment to review Government strategy in the early stage venture capital sector, the Board has been strengthened by the appointment of Christopher Wright who has extensive experience in early stage investing. Merger The principal benefits expected to arise from the merger are an increase in the range and diversity of the portfolio, an improved spread of risk and opportunity, a reduction in the proportionate level of running costs and a potential smoother flow of dividends as disposals are made from a wider portfolio. As a result of the merger, there are now 38 venture capital investments in the portfolio and the Company's net assets have increased to over £50 million. Net assets The merger terms were based on the relative net asset values of the three companies. Quester VCT plc's formula asset value per share at the time of the merger was 43.4p inclusive of provisioning for merger costs. As at 31 August 2005 its net asset value had fallen to 42.2p driven by write downs on Imagesound plc and Anadigm Limited. Dividends A special interim dividend of 1.25p per share was declared on 30 September 2005 and paid on 11 November 2005. This represented a dividend in excess of the amount of 1p per share as stated in the Listing Particulars to acknowledge an increase in the pace of realisations over the summer, so far at prices a little above valuations used for the merger. This will reduce the net asset value by 1.25p per share. The Board has reviewed the prospects over the next three years for realisations from the portfolio, the requirements for investment in fresh venture capital opportunities, including reserving for follow on investments and the Company's ability to distribute surplus resources by way of dividend. The Board has concluded that it should aim to pay small, but regular, dividends as far as it is able, and, if and when significant realisations are made, to consider increasing the dividend to reflect those circumstances. Change of auditor RSM Robson Rhodes LLP have replaced KPMG Audit Plc as auditor of the Company. Conclusion The Board is pleased that we are actively funding new investments once again. The priorities in the short term, however, are the realisation programme, where the pace and scale of transactions is increasing, and the payment of regular dividends. Jock Birney Chairman 16 November 2005 Investment Manager's Report Overview The merger has resulted in a venture capital trust with net assets of £51.3 million as at 31 August 2005 and an enlarged portfolio of investments. The venture capital portfolio now consists of 38 companies: 28 unquoted and 10 quoted venture capital investments. The merger has also freed up liquid resources for further investment. Our principal objectives over the next three to four years are to continue to work with and support the existing portfolio, with a view to achieving exits, and to continue to make new investments. Sector spread Following the merger, the portfolio benefits from a wider sector spread. Sector Percentage of Valuation at 31 Number of venture capital August 2005 investments portfolio at valuation £'000 % Software 22.6 5,794 10 Healthcare & life sciences 20.5 5,253 7 Industrial products & services 18.4 4,727 5 Internet 12.5 3,218 3 Consumer services 5.3 1,364 1 Publishing 4.4 1,119 1 Communications 4.0 1,015 2 Semiconductors 3.6 938 2 Computer hardware 2.8 708 2 Media 2.6 672 1 Consumer goods 1.2 299 1 Electronics 1.0 268 1 Leisure 0.8 200 1 Chemicals/ materials 0.3 87 1 100.0 25,662 38 Performance of the venture capital portfolio We are currently in a more favourable climate for early stage venture capital investments and, with the exception of the investments in Anadigm Limited and Imagesound plc, the portfolio has performed much as expected during the period. It is a very active period for M&A activity in the portfolio and we see the possibility of some cash exits within the next 12 months. We are particularly encouraged by the progress made by Antenova Limited, a leading developer of advanced antenna technology and innovative radio solutions used in wireless communications. The company has signed two significant contracts in the period. Following the completion of a £12 million funding round in January 2005, the company is well positioned to meet the needs of the global handset and laptop antenna market that is predicted to increase to over $2 billion by 2008. In October, Lorantis was acquired by Celldex Therapeutics Inc, a US based biotechnology company focused on the discovery and commercialisation of products for the treatment of cancer, infectious diseases and immune system disorders. The merger of the two companies should improve the prospect of an IPO. We continue to value this investment at Quester VCT's merger based cost. Three valuation changes have impacted the carrying value of the unquoted venture capital portfolio during the half year. The largest was the final write-off of Anadigm Limited, which resulted in a loss of £729,000 during the period based on merger cost. This investment had been substantially written down from its original cost over the last two years. This was a serious disappointment following the significant efforts made to develop and support this business, which a widely spread investment syndicate saw as having considerable potential. The company developed a product providing added functionality, potential cost savings and flexibility in design for electronic system companies building flexible analog circuits. Its failure arose from the fact that it failed to achieve fast enough growth in its sales. In addition, Reqio Limited entered into administration during the period and the final remaining value of £22,000 has been written off. The investment in Anthropics Limited has been down valued by £60,000, although we continue to work with the company to achieve a recovery of value. The quoted venture capital portfolio fell in value by a net £1.0 million largely resulting from a fall in value of Imagesound plc following a profit warning. The company's performance has been adversely affected by the recent short term performance of its system sales activity. The AIM market continues to react very harshly to unexpected negative news. Steps have been taken to strengthen the company's executive management and the share price since then has improved somewhat. Venture capital investments made during the period Following the merger and based on the increased combined liquidity and pace of realisations, Quester VCT has entered a new investment phase. We can now actively seek new venture capital opportunities on behalf of the Company, following the investment policy shared with our institutional fund. Four new investments have been made in the period at a total cost of £1.9 million. All four are early stage investments, although Global Silicon, Level Four and Pelikon are revenue generating, albeit at modest levels. Company Industry Sector £'000 Global Silicon Limited Semiconductors 600 Level Four Software Software 518 Nanotecture Limited Materials 87 Pelikon Limited Hardware 708 1,913 Global Silicon, a designer and manufacturer of integrated circuit solutions for the high growth consumer audio market, raised £6 million in a series B funding round and Jeremy Milne, a Quester director, joined the board. The company's lead product, Xin, is currently sold in audio systems such as boom boxes, MP3 players and iPod's in the UK and Europe. This is a rapidly growing market, fuelled by the widespread availability of digital music from download sites. The new funds will enable Global Silicon to expand its product range and its operations in Cambridge and China, with high volume production expected to commence in 2006. Level Four Software is an independent software company which supplies advanced software products for the testing and development of 'Automated Teller Machines' (ATM) services to major global banks and financial institutions. The ATM industry is expected to experience an exciting period of change over the next five years. Level Four Software is managed by an experienced management team and is well placed to meet the changing demands with its innovative technology. Henry Sallitt, a Quester director, has joined the board. The funds raised by the company will enable it to accelerate its development activities and support global expansion plans. Nanotecture, a nanotechnology materials company, develops products in the fields of power sources (supercapacitors), sensors and filtration with applications in a broad range of markets with significant opportunities. The supercapacitor market is estimated to be US$450 million in 2006. Development contracts and collaboration agreements have been signed with a number of key organizations. The funds raised, to be invested in tranches, will allow Nanotecture to fund development and bring products to the market place. Pelikon is an innovative manufacturer of thin, flexible electro luminescent displays for consumer electronics, home appliances and industrial applications. The company has made strong progress with the commercialisation of its display technology and over one million flexible displays have already been distributed worldwide. The investment, part of a £5 million funding round, will allow the company to accelerate growth. We have also supported the existing portfolio with four further follow-on investments totalling £0.8 million, as follows: Company Industry Sector £'000 Advanced Valve Technologies Limited Industrial products & 108 services Avidex Limited Healthcare & life 69 sciences HTC Healthcare Group plc Consumer services 511 Teraview Limited Healthcare & life 125 sciences 813 Realisations from the venture capital portfolio As we emphasised at the time of the merger, a key area of focus for us is the sale of the more mature investments in the portfolio. The progress made in this regard, both during the period and subsequently, has been encouraging and in line with our projections at the time of the merger. During the period three realisations totalling £2.4 million were made, as follows: Company Cash proceeds £'000 Casella Group Limited 1,121 Crown Sports plc 176 Loudeye Corp. 1,112 2,409 The majority of the holding in Loudeye Corp, a NASDAQ traded stock, whose paper was received on the sale of On Demand Distribution Limited (an investment held originally by Quester VCT 2 and Quester VCT 3) has now been sold. This investment has now returned aggregate cash proceeds of £1.1 million post the merger and £3.9 million in total, which, when taken together with the residual holding, is equivalent to a return of 1.3 times original cost. Cash proceeds of £1.1 million have been generated on the sale of Casella's environmental consultancy division. This represents 65% of the merger based cost. Almost half the Crown Sports holding was sold during the period generating cash proceeds of £176,000. The holding in Crown Sports was assumed in 2001 following the part cash, part paper disposal of Dragons Health Clubs plc. The return on the Dragons investment, inclusive of the Crown Sports proceeds and residual holding, amounts to £2.6 million or 2.6 times original cost. Listed equity and fixed interest portfolios The listed equity portfolio was valued at £15.8 million as at 31 August 2005 and since the merger has generated an annualized return of 4.3%. The listed fixed interest holdings were valued marginally above cost at the same date at £ 2.3 million and currently yield 4.6% per annum. The listed equity and fixed interest portfolios continue to be retained as a reserve to support the potential capital requirements of the venture capital investment portfolio. It is likely that the listed equity and fixed interest portfolios will reduce over the next 12 months as profits are taken and proceeds switched into venture capital investments. Conclusion The reduction in net asset value post merger, which was largely caused by two valuation changes, is disappointing. However, progress has been made by other companies in the portfolio and we have also made good progress towards realising some of the more mature investments: these two factors are encouraging and we currently expect to make further progress with realisations during the second half of the year. Quester Capital Management Limited Manager 16 November 2005 Fund Summary As at 31 August 2005 Cost Valuation % equity % of fund £'000 £'000 held by value Quoted venture capital investments Allergy Therapeutics plc 572 788 1.1% 1.5% Crown Sports plc 269 200 0.7% 0.4% Imagesound plc 1,848 672 12.1% 1.3% Loudeye Corp. 440 470 0.1% 0.9% Sirius Financial Solutions plc 195 127 0.8% 0.2% Sopheon plc 177 51 0.2% 0.1% Surfcontrol plc 493 583 4.3% 1.2% The Innovation Group plc 15 11 -% -% Vernalis Group plc 886 890 0.7% 1.7% XKO Group plc 884 800 1.7% 1.6% Total quoted venture capital 5,779 4,592 8.9% investments Unquoted venture capital investments Advanced Valve Technologies 2,600 457 11.1% 0.9% Limited Anadigm Limited 2,064 - 11.0% -% Antenova Limited 1,005 1,005 5.4% 2.0% Anthropics Technology Limited 70 10 7.0% -% Arithmatica Limited 338 338 12.5% 0.7% Artisan Software Tools Limited 2,100 1,172 23.4% 2.3% Avidex Limited 602 602 1.4% 1.2% Casella Group Limited 1,389 598 17.8% 1.2% Community Internet Europe Limited 1,015 634 17.4% 1.2% Cyclacel Limited 800 800 1.1% 1.6% Dycem Limited 187 373 37.5% 0.7% Elateral Holdings Limited 2,128 245 24.4% 0.5% Footfall Limited 2,900 2,900 17.0% 5.6% Global Silicon Limited 600 600 7.6% 1.2% HTC Healthcare Group plc 1,907 1,364 36.7% 2.7% International Diagnostics Group 1,178 689 23.9% 1.3% plc International Resources Group 32 400 4.0% 0.8% Limited Level Four Software Limited 518 518 9.3% 1.0% Linguaphone Limited 1,074 299 12.8% 0.6% Lorantis Holdings Limited 625 625 1.6% 1.2% Methuen Publishing Limited 1,119 1,119 43.7% 2.2% Nanotecture Limited 87 87 0.8% 0.2% Nomad Software Limited 1,818 887 18.7% 1.7% Opsys Management Limited 1,561 268 -% 0.5% Pelikon Limited 708 708 5.5% 1.4% Sibelius Software Limited 1,400 1,400 12.0% 2.7% Sift Group Limited 2,259 2,114 14.5% 4.1% Teraview Limited 858 858 4.9% 1.6% Total unquoted venture capital 32,942 21,070 41.1% investments Total venture capital investments 38,721 25,662 50.0% Listed fixed interest investments 2,304 2,311 4.5% Listed equity investments 15,484 15,833 30.9% Total investments 56,509 43,806 85.4% Cash and other net current assets 7,508 7,508 14.6% Net assets 64,017 51,314 100.0% The respective cost of investments shown above represents the post merger cost to Quester VCT plc. This reflects the original cost of the Company's investments held prior to the merger with Quester VCT 2 plc and Quester VCT 3 plc together with the merger value of those investments assumed from Quester VCT 2 and Quester VCT 3 on the merger. Unaudited Financial Statements Profit and loss account 6 months ended 13 Months 6 months ended 31 August 2005 ended 28 31 July 2004 Unaudited February 2005 Unaudited Audited £'000 £'000 £'000 Net losses on investments at fair (1,197) (1,878) (182) value Income 356 457 161 Investment management fee (273) (331) (199) Other expenses (244) (285) (166) Loss on ordinary activities before (1,358) (2,037) (386) taxation Tax on ordinary activities - - - Transfer from reserves (1,358) (2,037) (386) Earnings per share (2.1)p (6.0)p (1.1)p All items in the above statement are derived from continuing operations. The Company has only one class of business and derives its income from investments made in shares and securities and from bank deposits. The profit and loss accounts for the periods ended 28 February 2005 and 31 July 2004 have been restated to reflect the fact that the Company's investments are now designated as at fair value through profit or loss (see note 3). Balance Sheet Note 31 August 28 February 31 July 2004 2005 2005 Audited Unaudited Unaudited £'000 £'000 £'000 Fixed assets Investments 43,806 12,677 14,319 Current assets Debtors 2,041 793 1,612 Cash at bank 6,279 1,518 1,046 8,320 2,311 2,658 Creditors (amounts falling due within one year) Other creditors (812) (337) (495) Net current assets 7,508 1,974 2,163 Net assets 51,314 14,651 16,482 Capital and reserves Called-up equity share 2 6,085 1,661 1,682 capital Capital redemption reserve 2 161 112 91 Share premium account 2 37,318 3,410 2,787 Special reserve 2 7,540 7,900 14,780 Fair value reserve 2 (3,020) (1,474) (5,771) Profit and loss account 2 3,230 3,042 2,913 Total equity shareholders' 51,314 14,651 16,482 funds Net asset value per share 42.2p 44.1p 49.0p The balance sheets as at 28 February 2005 and 31 July 2004 have been restated to reflect the creation of a capital redemption reserve on the repurchase and cancellation of shares and the reclassification of the revaluation reserve as a fair value reserve. Summarised Cash Flow Statement 6 months 13 months ended 31 ended 6 months August 2005 28 February ended 31 2005 July 2004 Unaudited Audited Unaudited £'000 £'000 £'000 Net cash inflow/(outflow) from 461 (92) (176) operating activities Net cash inflow from merger 5,881 - - Net capital expenditure and financial (1,221) 264 (494) investment Financing (360) (370) - Increase in cash for the period 4,761 (198) (670) Reconciliation of net cash flow to movement in net funds Increase in cash for the period 4,761 (198) (670) Net funds at the start of the period 1,518 1,716 1,716 Net funds at the end of the period 6,279 1,518 1,046 Notes to the Unaudited Financial Statements 1. Merger of Quester VCT plc, Quester VCT 2 plc and Quester VCT 3 plc On 29 June 2005 the High Court sanctioned the Scheme of Arrangement for the merger of Quester VCT plc, Quester VCT 2 plc and Quester VCT 3 plc. Under the terms of the Scheme of Arrangement the Formula Asset Values (`FAVs') per share of Quester VCT, Quester VCT 2 and Quester VCT 3 were calculated, as at 24 June 2005, as 43.39p, 44.47p and 42.59p respectively, the related FAV ratios of Quester VCT 2 and Quester VCT 3 were 1.0249 and 0.9816. The shareholders of Quester VCT 2 and Quester VCT 3 on the register at the close of business on 24 June 2005 received 1,024 and 981 new shares respectively in Quester VCT plc for every 1,000 shares held in Quester VCT 2 and Quester VCT 3 (and so in proportion for any greater or lesser number of Quester VCT 2 and Quester VCT 3). Dealing in the new shares issued by Quester VCT commenced on 29 June 2005. Following the merger Quester VCT plc had 122,684,664 shares in issue. 2. Movement in reserves Share Capital Share Special Fair Profit capital redemption premium reserve value and reserve account reserve loss £'000 £'000 account £'000 £'000 £'000 £'000 At 1 March 2005 1,661 - 3,410 8,012 (1,474) 3,042 Effect of creating a capital - 112 - (112) - - redemption reserve At 1 March 2005 (restated) 1,661 112 3,410 7,900 (1,474) 3,042 Shares issued 4,473 - 34,106 - - - Shares purchased for (49) 49 - (360) - - cancellation Share issue costs - - (198) - - - Loss for the year - - - - - (1,358) Transfer of net unrealised - - - - (1,576) 1,576 loss on revaluation of investments Transfer of net realised - - - - 30 (30) loss to Profit and Loss account At 31 August 2005 6,085 161 37,318 7,540 (3,020) 3,230 3. This Interim Report has been prepared using new accounting standards, which have been issued to begin the process of converging UK standards with International Financial Reporting Standards (`IFRS'). The relevant standards are FRS 25 Financial Instruments: Disclosure and Presentation and FRS 26 Financial instruments: Measurement. These standards have been adopted by the Company with effect from 1 March 2005. The Company's business is to invest in financial assets with a view to profiting from their total return in the form of income and capital growth. The financial assets are managed and their performance evaluated on a fair value basis, in accordance with a documented investment strategy. Information about the financial assets is provided internally on that basis to the Company's board of directors and other key management personnel. Accordingly, upon initial recognition, the investments are designated by the Company as at fair value through profit or loss. The unrealised increase or decrease in fair value designated investments is now recognised through the Profit and Loss account. For investments actively traded in organised financial markets, fair value is generally determined by reference to quoted market bid prices at the close of business on the balance sheet date. Previously all listed investments were valued with reference to closing mid market prices at the balance sheet date. The effect of this change in accounting policy on the net asset value of the Company as at 31 August 2005 has been to reduce it by £116,000. The comparative figures have not been restated as the impact is immaterial. In addition, transaction costs incurred on the purchase and sale of investments are now charged through the Profit and Loss account in the period in which they are incurred instead of being included within the cost of the investment or deducted from the proceeds of a sale. This has no impact on the net asset value of the Company but impacts the unrealised and realised gain or loss on investments. The comparative figures have not been restated as the impact is immaterial. 4. The financial information contained in this report has been prepared on the basis of the accounting policies set out in the Annual Report, except as disclosed in note 3. 5. The number of ordinary shares in issue as at 31 August 2005 was 121,711,519 (31 July 2004: 33,646,953). 6. The calculation of earnings per share for the period is based on the loss after tax of £1,358,000 divided by the weighted average number of shares in issue during the period being 64,711,854 (2004: 33,981,517) ordinary shares of 5p each. 7. The unaudited financial statements set out above do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for the period ended 28 February 2005 have been delivered to the Registrar of Companies and received an audit report which was unqualified and did not contain any statements under s.237(2) and (3) of the Companies Act 1985. 8. Copies of the interim financial statements for the six months ended 31 August 2005 are expected to be posted to shareholders on 18 November 2005 and will be available to the public at the registered office of the Company at 29 Queen Anne's Gate, London, SW1H 9BU.

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